Are loans between individuals dangerous?

Private loans are one more financing option that you can take into account when you spend an economic hardship and need money. In Asian culture they are very common. Not so much in the West, although in recent years they have become more popular due to the difficulties in obtaining financing through the banking system.

In this article we will explain exactly what loans are between individuals, how they work, what their interest rate may be, how they are regulated and, most important of all, why they can become very dangerous for the debtor.

What is a loan between individuals?

As its name suggests, a loan between individuals is no more than a loan that occurs between individuals, without the intervention of any conventional financial institution, such as a bank. The one who lends the money can be a friend, a relative or a third party that we do not know anything about.

The mechanics of this type of loans is very similar to that of a conventional loan: a creditor lends a certain amount of money to a debtor and the latter agrees to return it, together with their corresponding interest, within a certain period of time.

What characteristics does a loan between individuals have?

The interest rate applied to the loan can be very small (and even nil) if it is a friend or a relative who lends us the money. On the contrary, if the creditor is a third party, the interests that it will surely demand will be much higher than those we can find in the banking market. In the latter case, you may also ask for an endorsement, which if it is a mortgage loan will be the home.

On the other hand, the repayment term of these loans is not usually as long as that which a traditional financial institution could grant us, so that their repayment could become more complicated.

Why are private loans so dangerous?

Go ahead that the loans between individuals are one hundred percent legal and have existed since the origins of civilization. There have always been wealthy people who, in exchange for an interest or commission, have lent money to others who needed it.

At present, if the loan is personal, it is regulated by Law 16/2011 of June 24, whereas if it is a private loan with mortgage guarantee, it is necessary to resort to Law 2/2009 of March 31.

Whether it is a personal loan or a mortgage loan, the ideal is that the agreement is raised to the public, that is, that we sign it before a notary. This is the best guarantee for both parties to cover their backs if a problem should arise in the future.

In summary, we are facing a loan with a high economic cost and whose repayment term is smaller. In addition, it is not guaranteed by the Bank of Spain, so the risk to the debtor is even greater.

Our advice is that before signing it, you have very clear all the conditions that appear in the contract, as well as the obligations that will arise as a result of it.